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Checking the Pulse of Semi Supply Chain for 3Q11: How long and slow will we go?

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Mid-quarter guidance has been coming in across the industry and with the ever-wobbly macroeconomic situation, all eyes have been on inventory, production and sales along the semiconductor and electronics supply chain.  We have been in what analysts are calling a 'pause' after what had been a nice upward trend, as we reviewed last week in this MarketWatch post.

Looking forward, analysts from both the industry and financial sides have begun weighing in on the health of the electronics supply chain.  While there is continued forward movement, thankfully, the slower pace, the 'pause', is lingering.  According to the latest edition (Vol. 21, No. 8) of Manufacturing Market Insider (MMI), third quarter (Q3) sales for "the six largest US-traded EMS providers" is still predicted to be up by 12.1% year-over-year for 2011, but:

"estimated Q3 revenue […] totals [US] $16.62 billion, up an anemic 1.2% from Q2.  In contrast, group sales rose 8.4% sequentially from Q1 to Q2.  If providers hit their guidance mid-points, then quarter-on-quarter sales growth in Q3 will range from -2.5% (Plexus) to 3.3% (Flextronics)." (ibid, p.1)

These data are still pointing to a positive growth year for 2011, at least for these largest EMS providers.  The fact that Q2 revenues beat estimates is going to go a long way in holding up the values for the year, given that Q3 has been a pause in the momentum.  The remaining question mark is, of course, whether or not the upcoming Q4 holiday season will keep us in the double-digit ranges for 2011 or not.

On the supply side, there are data across the industry showing that new product launches are gearing up for Q4, as we would traditionally expect.  Such a product build means there is more faith in the 'pause' scenario than a more negative view, that of a fallback into recession.

Financial analysts such as Citigroup Global Markets are raising initial red flags in general due to a less optimistic view of the macro economic situation, as they released last week in their latest "Electronics Supply Chain Inventory Update."  According to this report, inventory along the electronics supply chain is being more closely watched by financial analysts.  The reasons for this early caution are not within the industry, but rather due to recent forecast decreases for the "2011/2012 Global GDP [down to] 3.1%/3.2% from 3.4%/3/7% and US GDP [down to] 1.7%/2.7% […]." (ibid p.1, ff)  But, combining the lowered GDP forecasts with the lower book-to-bill ratios that recently came out for the semi industry (see this recent post from MarketWatch Commentary), there is broader concern for "business trends."  However, because of the seasonal cycles for the electronics supply chain and the historical trends, Citigroup does continue to hold positive outlooks presently and going foreward:

"[...] we still maintain that from a historical context, inventory levels still appear manageable based on several key metrics (provided end-demand remains stable).  Days of Inventory at 41 days (unchanged in the quarter) remains below the 5&10-year medians of 42 days." (ibid, p.3)

Perhaps the most positive news to be heard on the various 'Streets' over the past week is the following from this same Citigroup report (original emphasis!):

"when we look at a historical comparison of inventory levels vs. total revenue levels, […] this cycle's inventory level is supporting a higher revenue level than previous cycles which not only suggests inventories remain appropriate but also the supply chain is becoming more efficient." (ibid, p.6)

It is important to note, that this report does echo much of the quiet and more cautious affirmations of a healthy semiconductor and electronics supply chain.  Again though, the key data point is demand seasonality.  We will all just have to wait and see exactly what consumers and enterprises will do during the seasonal peak for our industry in Q4.

As of now, we are tracking below the historical trends for demand, but with excellent inventory corrections from the foundries on down, the supply chain health is good, particularly for the present economic climate.  We will continue to monitor the entire semiconductor and electronics supply chain and provide more detailed insights in the upcoming MarketWatch Quarterly due out to subscribers (free subscription available here) in mid-September.


Lisa Ann Cairns, Ph.D.
Written on Wednesday, 31 August 2011 13:00 by Lisa Ann Cairns, Ph.D.

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